Economist, partners clinch USAID award for drought insurance

Mude, Dyson with pastoralists
From left, award winners Andrew Mude and Chris Barrett inspect cattle with pastoralists in Ethiopia.

A Cornell development economist and his partners in the USAID-funded BASIS Assets and Market Access Innovation Lab have won an international award for developing a form of livestock insurance that has already proved itself in pilot testing. Now that it is scaling up, the insurance could help hundreds of thousands of African herders stave off poverty in times of drought.

The United States Agency for International Development’s (USAID) Board for International Food and Agricultural Development has given its 2016 Award for Scientific Excellence to Chris Barrett, the Stephen B. and Janice G. Ashley Professor of Applied Economics and Management at the Charles H. Dyson School of Applied Economics and Management; Andrew Mude, Ph.D. ’06, principal economist at the International Livestock Research Institute; and Michael Carter, professor of agricultural and resource economics at the University of California, Davis. The award will be presented Oct. 12 at the 2016 World Food Prize international symposium in Des Moines, Iowa.

Also at the symposium, the World Food Prize Foundation will honor Mude with the 2016 Norman Borlaug Award for Field Research and Application for his innovative and impactful work.

For the USAID award, only projects funded by a Feed the Future Innovation Lab were eligible. USAID funded the winning project through a grant to the BASIS Access and Market Access Innovation Lab that Carter directs from UC-Davis.

The USAID award is for an innovative index-based form of livestock insurance, which reduces the adverse impact of extreme weather on some of the developing world’s most vulnerable people. The model – originally designed by Sommarat Chantarat, Ph.D. ’09, as her economics doctoral dissertation at Cornell – is unique in that it uses satellite imagery that measures the condition of grazing land in an attempt to accurately predict livestock losses.

“This is recognition for the quality of the underlying science,” said Barrett, deputy dean and dean of academic affairs at the College of Business. “But it’s only getting recognized because it’s having a real-world impact. That intersection is the hallmark of Cornell.”

Governments have noticed. Officials in Kenya recently announced they will launch a new nationwide livestock insurance program based on the concept. With 40 percent of the livestock production in Kenya generated by herders, pastoralism is important to the national economy.

“They decided that this was a much more cost-effective design for providing drought assistance in arid and semi-arid areas where people rely on livestock for their livelihood,” said Barrett. “It’s gone to scale very quickly.”

In developing this insurance approach, Barrett’s research group had already established that available early-warning data could generate accurate predictions of humanitarian emergencies. And they knew a great deal of drought risk was essentially uninsured and uninsurable with existing products, Barrett said. “We were looking to fill that gap quite expressly,” he said.

The pastoralists’ vulnerability had a ripple effect on the global humanitarian system, which suddenly had to attend to more destitute people when drought tipped previously-viable herders into poverty. And it hurt local forests, rangeland and wildlife, which the drought-stricken pastoralists exploited to survive.

“There were systemic effects here,” Barrett said. “The insurance was intended to help with management of a variety of different problems that all originate from major weather shocks like drought.”

The method was rooted in economic theory and econometrics, but the basic principle was simple, Barrett said: “Figure out how to plug a hole in the local marketplace that was leaving people very vulnerable.”

Cornell researchers and their partners found that this statistical approach accurately predicts average herd losses, eliminating the need for costly verification of individual loss claims.

In 2010, the team launched a commercial pilot in northern Kenya. A year later, a severe drought hit the country. The insurance performed well, generating payouts that substantially reduced policyholders’ suffering from the disaster.

They replicated the index in Ethiopia, with a slightly different design and different partners. That variation worked, as well. So did a sharia-compliant version designed with yet another company for Muslim populations.

The International Livestock Research Institute now deals with most insurance-related activities like contract design and extension education. But Barrett’s research group still helps with technical backstopping and impact evaluations.

Carla Gomes, professor of computer science and director of the Institute for Computational Sustainability, heads up a related Cornell team that has developed simple cell phone apps that the pastoralists can use to report conditions at their grazing sites.

“Having run a couple of real-world experiments with this and found that it really does work as designed, now the private sector and the governments are interested in moving it out to a bigger scale,” Barrett said.

USAID also awarded Barrett, Carter, Mude, and their team a Pioneers Prize in Science and Technology in 2013.

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Rebecca Valli